Making local taxation fairer

The plans I am setting out today propose both short and long term reforms of local government taxation. At the heart of our proposals for reform are two key pledges. Firstly that we will make the funding of local services fairer – in a reasonable, measured and balanced way – and second that in so doing we will generate additional funding for schools and ensure additional support for children in low income households.

The key elements of the reforms I am announcing today – which will take effect from April 2017 – are as follows:

Those living in the highest value houses – bands E, F, G & H – will pay more as a result of the multipliers for these bands being increased relative to band D properties.

These reforms to the multipliers will lead to average increases for Band E properties of just over £100 per year, just over £200 per year for band F, £335 per year for band G and, for the top band H, the average increase will be £517 per year.

Of course, there are some low income families living in higher band housing. Many of them will already be in receipt of council tax reduction. However, we will extend the council tax reduction system to put in place an exemption for households on these bands who are below median earnings – up to a maximum of £25,000 net income. This will exempt around 54,000 households from the changes – a third of them pensioner households.Those living in the lowest banded properties – A, B, C & D – will pay no more than they do now.

That means three out of four households, 1.8m in total, will be unaffected by the band changes – though some of them will benefit from the change in the child allowance that I will come on to later.

These band changes will raise an additional £100m per year in revenue. I can confirm today that we intend to work with local authorities to ensure that this additional revenue is invested directly in schools. I will make further announcements on this in due course.

The final aspect of the short term reforms I am announcing today relate to support for children and families and addresses a particular challenge set by the independent Poverty Adviser in her report earlier this year.

To provide additional support for families on low incomes – across all council tax bands – we will increase the council tax child allowance by 25%. This will directly benefit 77,000 low income households by an average of £173 per year. This boost for low income families will help almost 140,000 children across Scotland.

So these are the immediate changes we propose. Those living in the most expensive houses will pay more – with an exemption for those on low incomes. Families with children on low incomes will pay less.

And we will raise an additional £100m a year for schools – which will benefit everyone.

It is worth noting that, taking account of these reforms, the council tax that people pay across all bands will still be lower, on average, than the equivalent bands in England. And it will be lower than it would have been had the council tax freeze not been in place for the past eight years.

Before I turn to the longer term reform we propose, I want to deal with the council tax freeze.

The freeze will remain in place until April 2017, delivering on the 2011 manifesto commitment we made.

As we have always said, the freeze cannot be continued indefinitely. However, I am also clear that we must not see a return to the sky high annual council tax increases of old – let’s remember that, in the years before we took office in 2007, council tax had risen by 60% and many people were paying more in council tax than they were in rent or mortgage.

Therefore, I am confirming today that, from April 2017, the council tax freeze will be lifted. Councils will have the discretion to increase tax – but only up to a maximum of 3% a year.This will enable councils – if they choose to use this discretion – to raise up to £70m of additional revenue and to be accountable to their local electorates for doing so.

I can also confirm that we will allow councils to retain the £70m a year that we have up until now given them to freeze the council tax – that means that any revenue they choose to raise by increasing council tax will be genuinely additional.

Let me turn to the medium to longer term.

In line with the views set out in the Commission’s report, we want to make the sources of tax that fund council services more diverse. We want to reduce the dependence of councils on grant from the Scottish government. And we want the taxes that fund local services to be progressive overall. Our new income tax powers will allow us to do this in a way that wasn’t open to us before.

So I can confirm today that immediately after the election – should we be re-elected – we will formally consult councils on exchanging a fixed proportion of their general revenue grant for the assignment of a fixed proportion of income tax receipts.

This reform would also mean that, in future, only 25% of council spend would come from central government grant. The remaining 75% would come from taxes, charges and other income – making local authorities more financially accountable. And it would mean that, overall, the taxes that fund councils would be progressive.

The Commission also said that allowing councils to levy additional taxes should be considered. We will listen to councils’ views about that. But I can confirm at this stage that we will actively consult on enabling councils to levy a tax on unused development land and on vacant and derelict land. This will help to reduce landbanking and increase the supply of homes.

In summary –

The reforms I am setting out today are fair, reasonable and measured – they bear in mind that the commitments politicians make on tax have to be paid for by hardworking people across the country.

In the short term, they will make the current council tax system fairer by asking those at the top to pay more, protecting the incomes of the majority, and reducing the burden on some of those who can least afford to pay, with a deliberate focus on families with children.

They will generate additional revenue of half a billion pounds over the next parliament that we will invest directly in schools.They will give councils more flexibility – enabling them to raise additional revenue for general services – without a return to the bad old days of sky high council tax rises.

And, in the longer term, our reforms will diversify the sources of council funding, reduce councils’ reliance on grants and make the funding of local services progressive overall.

They are sensible changes and I look forward to asking the Scottish people to support them.